Company Law - Sleepy Head Pty Ltd - Assignment Example

COMPANY LAW STUDENT NAME PROFESSOR’S NAME COURSE TITLE DATE Question 1 In this case, the issues are that Dozey, a sole trader running the Sleepy Head Business, specializing in selling mattresses and Bed-ware insures it against fire, theft and the like at as sum of $1,000,000. In February 2013, Dozey signed a contract of sale agreement with Sleepy Head Pty Ltd which purchases the businesses from him with the company issuing him; a substantial block of shares as fully paid with debentures for a sum secured by a charge over all the company’s assets. He is nevertheless injured while working at the company’s premises while at the same time burglars steal the company’s stocks. a) Enforce his charge against Sleepy Head Pty Ltd The issue under consideration is whether Dozey can enforce his charge against Sleepy Head Pty Ltd despite the fact that he is one of the owners of the company. According to the precedent set in Salomon v Salomon & Co Ltd1 that upon the incorporation of a business entity, the business becomes a separate legal entity from its owners and promoters. In this case, Sleepy Head Pty Ltd and Dozey are two separate legal entities recognized by the law each with their own rights. The case shares similarity with that of Salomon v Salomon & Co Pty Ltd2 whereby Salomon was a sole trader and later incorporated Salomon & Co Ltd while overvaluing the share price to the shareholders while at the same time, he became a secured creditor of the company. The House of Lords after a series of appeals held that Mr. Salomon was neither an agent nor a trustee of the company and therefore was entitled to his claim as a secured creditor. This is because the separate legal entity doctrine contemplates that there is a distinction between the assets of the company and that of the individual, separation between the members and the company in relation to company’s debts3. This principle has been restated in Australia in the case of Andar Transport Pty Ltd v Brambles Ltd4 that it is immaterial whether the plaintiff had control or capacity to control the activities of a company but that the separate entity principle applies distinctly to the company as a separate legal individual. In conclusion, Dozey can enforce his claim against Sleepy Head Pty Ltd since the company is a separate legal entity and that in instances of liquidation of a company; a secured creditor is entitled to be paid first regardless of his association with the company. b) Enforce the claim of sleepy Head Pty Ltd against Risk Ltd to recover the value of the goods stolen The issue that needs determination is whether Sleepy Head Pty Ltd has an insurable interest in the stock stolen by burglars from its premises. A company is a separate legal entity, separate from its owners5 and it has the capacity to acquire assets, enter into contracts, sue and be sued by other parties or individuals. There is also a distinction between the assets of the company and those of the individual in relation to a company. In the case of Macaura v Northern Assurance Co Ltd6 whereby the owner stored timber owned of the company he formed in his property and insured the timber under his name which was destroyed by fire. The defendant stated that Mr. Macaura had no insurable interest in the timber under insurance law. The Court held that the debt was not exposed to fire and nor the shares and that his relations with the company did not extend to the goods. The case highlights the long-standing precedent that there is a separation between company assets and those of an individual. It is of importance to take into account the provisions of section 267 of the Corporations Act that prevents an insolvent company from granting a charge or security in favour of an officer associated with the company in a way that prejudices other creditors7. One needs permission from the court in order to enforce the charge. In conclusion, the Company Sleepy Head Pty Ltd had an insurable interest over the stolen property unlike in the case of Macaura v Northern Assurance Co Ltd8, and therefore the company and not Dozey can enforce the claim on the stolen stock. Further Dozey might need to enforce the charge by obtaining permission from the Court. c) Enforce his claim against Compo Ltd for the payment of his medical bills The issue in this case is whether Dozey can enforce his claim against Compo Ltd for the payment of his medical bill despite being the owner of Sleepy Head Pty Ltd. In the case of Lee v Lee’s Air Farming Ltd9 Mr. Lee the major shareholder and the governing director running a crop dusting business was contracted to work as a chief pilot. The company having taken out an insurance policy, Mr. Lee in the course of his employment died through an aircraft accident. The issue was whether Mrs. Lee was to recover compensation under the policy after his death. The court held that Mrs. Lee could recover under the policy since Mr. Lee was an individual under a contract of employment, separate from the company. Further, in the case of Nichol v Allyacht Spars Pty Ltd10 the court stated that an employee is entitled to recover damages in negligence against the corporate employer despite being a director. In conclusion, Dozey can enforce his claim against Compo Ltd for the payment of his medical Bill. This is because Dozey is a separate individual from the company and him working in the company clearly makes him an employee and can benefit from the insurance policy covering all the workers. Question 2 The Ideal Company In advising Lee on the best type of business that suits his needs, it has to take into consideration his business undertakings. Lee has operated as a sole trader in computer business in Sydney. The status of Lee is that he is currently single but he wished to marry soon while at the same time his income and taxes are increasing. A sole proprietorship run by Lee is one of the simplest forms of business entity since one can own and operate it solely under his own name, there is no need for government registration, one takes sole liability for debts and that one can terminate the business at any time. In this case, the best form of business ideal for Lee is a Proprietary Company. This is a company identified as a small family business with a paid up capital of $1 managed and controlled by one person11. It is also the best since Mr. Lee wishes to marry and have children and can therefore make his wife as the other director of the company. The advantages of a proprietary company is that it is ideal for a small company, enjoys financial secrecy, it is regulated by less regulations compared to a public company while at the same time it is less expensive to maintain12. A company as established in the case of Salomon v Salomon & Co Ltd13 is a separate legal entity from that of the individual who creates it. It implies that once Lee has registered the company, he is entitled to act as a separate entity from the company. The elements of a company are that it; can be able to own property and dispose the property and its other assets14. A company as a separate legal entity is capable of entering into contracts while at the same time it has the capacity to sue and be sued. Moreover, a company has an advantage in that despite the member’s death, retirement and resignation, the company still has the element of perpetual succession. Limited liability is an element of companies that is shareholders are not liable in their capacity as shareholders for the company’s debt. This follows the precedent set in the decision in Salomon v Salomon & Co Ltd where the company was held liable for its debts while at the same time the debts are not those of the person controlling or owning the company. The Corporations Act states that if a company fulfills the following requirements: have a gross operating revenue of less than $25 million for a financial year, gross assets of less than $ 12.5 million at the end of financial year and fewer than 50 employees at the end of a financial year, then it is a small proprietary company15. Creation In establishing a company, one must fulfill the essential components contemplated under the Corporations Act 2001. One needs to fill out an application form under section 117 of the Corporations Act. The registrat.ion Form 201 requires the details of the type of company one is forming, the share structure, directors, secretary, the members’ details and the location and details of the office. When choosing a company’s name on can propose and preserve a name with ASIC with a Fee as long as the name is not offensive , illegal or suggestive or can acquire a name through acquisition by giving it a unique number that must appear in all public documents under section 123 and 153 of the Corporations Act. Moreover, Lee will be required to draw up the company’s Constitutions that will enumerate the internal management structure of the company16. This will deal with the appointment and removal of directors, the dispute resolution mechanism, the share allocation, meetings and other internal management issues that need to be provided for in the company’s constitution. However, these requirements are not applicable to proprietary companies such as the appointment of company secretary, appointment of an auditor, and the disclosure of obligations under section 195 of the Corporations Act. According to the Corporations Act since he is a sole member of the company, then a proprietary company needs at least one director17. Further one needs to pay the applicable registration fees of about $40018. After registration, there are post registration requirements that are necessary to formalize the existence of the company. This includes having a registered office19, appointing the company secretary20, appointing an auditor21, appointing a public officer, maintenance of a minute book22 and keeping ASIC informed on relevant issues and matters. The other administrative issues that relate to management of a company include; insuring the company, opening of a bank account creating the company’s common seal bearing the name and the ACN number of the company. In conclusion, Lee can opt to create a proprietary company suitable for his small business. This is because in future he can make his wife one of the potential directors and that it is easy and efficient to run than other types of incorporated associations. Works Cited Salomon v Salomon & Co Ltd [1897] AC 22 Corporations Act 2001 (Cth) Harris, Hargovan & Adams, Australian Corporate Law (4th ed, LexisNexis, 2013) Lee v Lee’s Air Farming Ltd23 Macaura v Northern Assurance Co Ltd [1925] AC 619 Read More